The U.S. Court of Appeals for the Second Circuit recently held that a debtor's claim under the federal Fair Debt Collection Practices Act was not precluded by a judgment in a prior class action in which the debtor was an unnamed class member, ruling that where notice of the class action appeared only once in a national newspaper, debtor's due process rights to notice and the opportunity to opt out were not satisfied. A copy of the opinion is attached.
A debtor ("Debtor") filed suited against a debt collector ("Debt Collector"), alleging that Debt Collector violated the federal Fair Debt Collection Practices Act ("FDCPA") and the Connecticut Unfair Trade Practices Act, by supposedly placing telephone calls to Debtor without identifying itself, and by failing to disclose that Debt Collector was attempting to collect a debt and that any information obtained would be used for that purpose.
Debt Collector moved to dismiss, arguing that Debtor's suit was precluded on res judicata grounds because an earlier class-action settlement ("Settlement") concerning the same claims barred the suit.
In the prior class action, Gravina v. United Collection Bureau, Inc., No. 09 Civ. 4816 (E.D.N.Y. Nov. 29, 2010)("Gravina"), the court certified the class under Rule 23(b)(2) of the Federal Rules of Civil Procedure, and the parties entered into a settlement agreement. In order to inform absent class members of the class action and the proposed settlement, the parties published a single notice in a nationally circulated newspaper.
Noting that no objector appeared following publication of the notice, the Gravina court later entered an order approving the class-action settlement, which broadly defined the "Settlement Class" as anyone in the United States who received a telephone message from Debt Collector that did not comport with the FDCPA's requirements. Under the Settlement, each named class representative received $1,000 in damages plus additional payment for their services to the class members. Damages for the estimated two million unnamed class members amounted to roughly $13,000, representing 1% of Debt Collector's net worth, which amount was intended to go to a national charitable organization. The settlement also provided injunctive relief whereby Debt Collector was to identify itself and state the debt-collection purpose of its communications.
The district court in this case dismissed Debtor's law suit, ruling that Debtor was bound by the Gravina Settlement because the newspaper notice satisfied due process, and the amount of money at stake was "miniscule" given the number of class members.
Debtor appealed. The Second Circuit reversed and remanded, ruling that because Debtor had a due process right to notice that was not met by a single notice published in a nationally circulated newspaper, Debtor was not barred from pursuing her claim.
As you may recall, the FDCPA provides in part that in the case of class actions, named class representatives may recover up to $1,000 in damages. See 15 U.S.C. § 1692k(a)(2)(B)(i). Unnamed class members may recover up to $500,000 or 1% of the net worth of the debt collector, whichever is less. See 15 U.S.C. § 1692k(a)(2)(B)(ii).
In addition, class certification is authorized under Rule 23(b)(2) where "the party opposing the class has acted or refused to act on grounds that apply generally to the class, so that final injunctive relief or corresponding declaratory relief is appropriate respecting the class as a whole." Fed. R. Civ. P. 23(b)(2). Rule 23(b)(3) authorizes class certification where common questions of law or fact predominate over any questions affecting only individual members. Fed. R. Civ. P. 23(b)(3).
The Second Circuit began its analysis by noting in part that the definition of "class member" in the Gravina Settlement included persons in Debtor's position, but that res judicata did not bind class members "where to do so would violate due process." See Stephenson v. Dow Chem. Co., 273 F.3d 249, 260 (2d Cir. 2001), aff'd in part and vacated in part, 539 U.S. 111 (2003).
The Court explained that absent class members have a due process right to notice and an opportunity to opt out when the action is "predominantly" for money damages. See Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 811-12 & n.3 (1985)("Shutts"). Moreover, the Court noted that the U.S. Supreme Court expanded the right to notice and an opportunity to opt out under Rule 23 to include claims for money damages that are more than "incidental." See Wal-Mart Stores, Inc. v. Dukes, 564 U.S. __, 131 S. Ct. 2541, 2558-59 (2011)(right to notice and opportunity to opt out under Rule 23 now applies not only to class actions predominantly for money damages, but also to class actions where the claim for money damages is more than "incidental").
Noting that the United States Supreme Court in Dukes left unresolved the question as to whether due process rights extended to actions where money damages did not predominate, the appellate court ultimately concluded that the claim in Gravina for monetary relief predominated over the claim for injunctive relief. Cf. Robinson v. Metro-North Commuter RR. Co., 267 F.3d 147, 165 (2d Cir. 2001)(observing in part that "due process may require the enhanced procedural protections of notice and opt out for absent class members" where "non-incidental monetary relief" is involved). Accordingly, the Second Circuit determined that in this case Debtor had a due process right to notice and an opportunity to opt out.
Next, recalling that due process requires that notice be "reasonably calculated, under all the circumstances, to apprise" the absent class members of the pending class action and to provide them an opportunity to object, the Court observed that constructive notice by publication may satisfy due process where the identities of the class members are not ascertainable through due diligence. Pointing out, however, that the district court in Gravina never determined whether the class members' identities were ascertainable, the appellate court concluded that even if the class members were ascertainable, the single notice published in the national newspaper did not satisfy due process or Rule 23(b)(3) that allows class certification based on commonality.
In so ruling, the Second Circuit among other things referred to the single notice in this case as a "mere gesture" and rejected Debt Collector's assertion that it was not required to provide the "best practicable" notice to the class members because the Gravina class action was certified under the injunctive relief provision of Rule 23(b)(2) rather than commonality under Rule 23(b)(3). As the court explained, "certification of a class under (b)(2) does not excuse the due process requirement that unnamed class members in a class action predominantly for money damages receive the 'best practicable' notice." See Shutts, 472 U.S. at 812.
Finally, the Court also rejected Debt Collector's argument that the negligible amount of money to be awarded to the individual class members somehow justified "lesser notice," recognizing that single claimants may recover up to $1,000 in statutory damages whereas damages for unnamed class members are capped at potentially severely reduced levels. The Court stated: "Given this contrast between the damages available to unnamed class members and those available to individual plaintiffs, it was all the more important that [Debtor] receive adequate notice before being deprived of her individual right to sue."
Accordingly, the Second Circuit reversed the dismissal of Debtor's FDCPA claim, vacated Debtor's claim under the Connecticut Unfair Trade Practices Act, and remanded for further proceedings.
Ralph T. Wutscher
McGinnis Wutscher LLP
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